On November 30, 2017, the Bank of Canada (BoC) released a staff white paper cautiously in favour of creating a central bank-issued digital currency (CBDC) for Canada. Referencing the continuing trend toward using electronic forms of payment in lieu of physical currency, the white paper explores the possible economic benefits of a CBDC and whether such benefits would justify the move. Although none of the proposed benefits are a panacea, the white paper takes the position that a CBDC would not disrupt the financial system in a negative way. Rather, if implemented carefully, it may promote cost savings, efficiency and greater stability.

By releasing the white paper, the BoC adds to the conversation taking place among central banks across the world. The Federal Reserve Bank of New York recently confirmed that the U.S. is also paying attention to digital currencies and are considering issuing their own. The Central Bank of England has been engaged in a multi-year research project regarding the implications of issuing a digital currency since 2015. Other countries have been more aggressive, such as Russia promising to issue the CryptoRuble in the near future as a means of fighting tax avoidance. Japan is already testing its J-Coin in hopes of moving the Japanese economy away from “non-productive” physical currency by 2020. Should the BoC decide to issue a CBDC, it will likely be in good company.


The white paper describes a hypothetical CBDC that resembles physical currency as closely as possible, through which the supposed benefits of a CBDC can be measured. In particular, the CBDC would be:

  • Supplied by the BoC, which would not charge fees for using it
  • Accessible on a non-exclusive basis via private digital wallets on a variety of devices
  • Subject to the same anti-money laundering and know-your-client measures used by banks with respect to cash transactions
  • Anonymous, provided the CBDC does not earn interest (the potential benefits of the CBDC change significantly if the CBDC pays interest — we discuss both options below)
  • Exchangeable on par, among other things.

The availability or cost of the technology that would be required to implement the hypothetical CBDC is not considered in the white paper. In the long term, a CBDC would likely be less expensive than a physical currency by reducing production and storage costs, but in the short term, the start-up costs associated with acquiring and maintaining the new technology would significantly impact the potential benefit of introducing a CBDC. The white paper’s analysis is also premised on complete elimination of physical currency, whereas in reality, the transition would likely take place in phases and over time to mitigate any growing pains.


The white paper considers six potential benefits and whether such benefits justify moving to a CBDC. Most are dismissed outright for “not provid[ing] a compelling motivation to issue CBDC.” Arguably the most persuasive benefits are those that relate to reducing costs by eliminating production and storage costs of physical currency and forcing other actors to reduce fees to compete. In particular, the white paper considers:

Increasing Contestability in Payments

The white paper explores whether a CBDC could improve contestability and efficiency relative to other forms of payments. Identifying this as the most plausible potential benefits, the white paper considers increased contestability from the perspective of day-to-day retail transactions and the large-value payment system, as well as the impact on the benefits if the CBDC earns interest.

From a retail perspective, a CBDC would certainly add to the competition among e-transfers, debit and credit cards. However, Canadians already have options for low-cost payments and a non-interest earning CBDC would not likely change consumer behaviour on this basis alone.

The CBDC could facilitate transactions that are currently foregone because of frictions and limitations of existing systems. For example, smaller merchants that feel burdened by the transaction costs of accepting premium credit cards may choose to accept the CBDC and stop accepting certain credit cards. As well, consumers who avoid using e-transfers or credit cards online due to privacy or security concerns may find the CBDC to be a good alternative. Credit card issuers have been able to compete with lower-cost forms of payment in the past, such as debit cards and cash, by offering benefit and rewards programs for cardholders. If the CBDC were to pay interest, the CBDC might become a credible competitor for credit and debit card issuers.

From the perspective of large-value payments, the CBDC could facilitate open access to the payments system such that any payment agent would be able to settle its payments with finality and in real-time. As part of that autonomy, agents would also have to pre-fund their payment needs and obtain liquidity support and overdraft protection from their banks. This approach is consistent with recent recommendations from the Competition Bureau to reduce barriers formed by the payment system infrastructure. However, the security and efficiency of the existing settlement system, which features a liquidity-saving settlement queuing system and the BoC’s overdraft protection, make it unlikely in the BoC’s eyes that a CBDC would compete with the existing payment system.

If the CBDC were interest-bearing, contestability would likely further increase as more people shift away from forms of payments that apply fees. However, the white paper speculates that any gains in contestability would be marginal. Especially in the case of large-value payments, the efficiencies of the existing system would offset any interest earned on CBDC.

Ensuring Adequate Central Bank Money for the Public and Preserving Central Bank Seigniorage Revenue

A decline in demand for physical currency would threaten the BoC’s revenue from seigniorage, the profit made by the BoC from the volume of physical currency in circulation. The profit is a function of the interest earned on the volume of physical currency in circulation, less the costs of producing and distributing the physical currency. As the volume of physical currency used in Canada slowly declines, the BoC’s seigniorage will also decline unless the BoC finds a new revenue stream, potentially in the form of a CBDC. The more closely a CBDC resembles physical currency, albeit with the convenience and low cost of being in digital form, the more likely the CBDC would be able to supplement the role once served by physical currency for the BoC. The white paper believes some demand for cash will persist where people want security and privacy for their transactions. This might change if the CBDC earned interest because demand for the CBDC would likely greatly increase. But, paying interest would also reduce the seigniorage earned by the BoC. On the whole, the potential benefits of the CBDC for the BoC as a source of revenue are minimal.

Reducing the Lower Bound on Interest Rates and Supporting Unconventional Monetary Policy, such as Quantitative Easing

In recent months, there has been scrutiny regarding low interest rates in Canada and the impact on consumer behaviour and debt patterns. Putting aside whether reducing the effective lower bound on interest rates to spur demand is good monetary policy, the white paper considers whether issuing a CBDC would be necessary to do so. By holding cash, depositors and investors can avoid instruments with a negative interest rate. If physical currency is eliminated in lieu of CBDC, depositors and investors would have no choice but to continue to invest funds. Ultimately, the white paper decides that reducing the effective lower bound on interest rates can be achieved by reducing the number of large-value notes circulated, without necessitating introduction of a CBDC. A CBDC is also not the only way the BoC could distribute “helicopter money” directly to households and firms to support quantitative easing, but could make implementing such a measure easier. Overall, the white paper did not find these potential uses to be sufficient reasons to switch to a CBDC.

Reducing Aggregate Risk and Improving Financial Stability

To the extent that people rely on the CBDC as a means of payment and for storing value, the white paper takes the position that aggregate risk and financial stability would benefit because the CBDC would be “risk-free” compared to the current system of banks issuing claims in respect of deposits. It is also considered whether a shift away from depositing money with banks would damage financial stability. If the CBDC did not pay interest, a sudden mass switch away from bank deposits seems unlikely. However, if people could earn interest on CBDC, a rush to switch is much more likely, especially if banks cannot offer a competitive spread. The white paper is optimistic that banks will be able to compete with an interest-earning CBDC by offering creative products, raising rates and cutting costs. It acknowledges that in periods of stress or volatility people may switch to the CBDC, potentially prolonging disturbances in the financial system.

Promoting Financial Inclusion

The vast majority of Canadians report having a bank account and debit card, suggesting that financial inclusion and access to currency are not major issues in Canada relative to other countries. The white paper also points to other effective means of promoting financial inclusion that are being tried in other countries, concluding that this potential benefit of a CBDC is not sufficiently compelling on its own.

Inhibiting Criminal Activity

The white paper dismisses CBDC as an effective means to combat money laundering. Assuming the CBDC displaces physical currency, the reduction or elimination of large-denominated notes could inhibit some criminal activity. However, the “CBDC itself could also be well-suited for criminal activity if it were anonymous, as is cash.” Should the CBDC be interest-bearing, it could not be fully anonymous, which might discourage people from using it for criminal activity.

On the whole, the white paper identifies many potential benefits of a CBDC. In the BoC’s view, none of those benefits are deemed adequately compelling — or perhaps the status of physical currency in Canada is not sufficiently dire — to warrant an immediate or complete move to a CBDC. Given the expected continuing decline of physical currency, it is almost certainly inevitable that a CBDC will one day displace cash, and this white paper indicates that many will stand to benefit from the transition. The fact that the BoC devoted its resources to this study, combined with increasing public interest in, and acceptance of, digital and cryptocurrencies, suggests that this transition could start sooner rather than later.